The Mega Debt and a Sustainable Capitalism

Posted by: on Jul 7, 2014 | No Comments

James Gillray cartoonAccepted thought acknowledges the financial crisis of 2008 was a near apocalyptic event which needed the citizens of the Anglo American dominated financial world to bailout the banking system to the conservative tune of $10 trillion in the US, and at least £1 trillion by UK taxpayers.  For perspective, the entire cumulative national government debt in the UK stood at £350bn at the turn of the century.

Why then was a bailout required?  Would we have woken and the sky had fallen? No.
The answer given was that these institutions were of such systemic importance they were too big to fail.  Undoubtedly, if failed institutions were allowed to fall the vista of the financial landscape would have been different.  Some investments would have collapsed in value, some employees would have lost their jobs, but most importantly some debt would have defaulted and deflationary ripples would have been felt across the Anglo-American hemisphere and wider, but the systemic levee would not have broken with a coordinated isolation of the patient and enforced market holidays.

So what have we gained for this vast outlay?  We have gained the continued existence of a financial system whose models are exposed and tail-risk dramatically undervalued, stability has been actually decreased as our debt problem persists in a vastly compounded form.

When banking profits are wholly private, yet losses entirely socialised, the dynamics of free market capitalism are critically broken.  When conducting business the agent cannot act for both buyer and seller.  This conflict of interest cannot exist in free markets.  Any business or industry who becomes too big to fail, means the game is now rigged, as Adam Smith always said it would be, and to play a rigged game as though it is fair and expect different, better results is a dangerous form of collective narcissistic madness.  Its simply a battle between good and bad practice.  Of course painful events always leave a scar, but real progress can only be achieved by allowing the seeds of future growth to germinate, flourish and grow.  Business works best under a state of constant competition.  If unable to continue playing the game of business, failed organisations must make way for the new. Only byway of this simplification can we remain human in nature.

The socialised costs are to be paid, not in one go, but for generations to come, in the form of inflation.  Negative real rates currently cost everyone more than 2% pa and together with rising real asset prices, the availability and access to them will divide both generationally and more importantly inter-generationally.  Only sustained inflation can continue to prop this broken system up.

Unfortunately for the Federal Reserve et al the problem is even deeper.  The prescription of growth and inflation exposes the system to a normalisation of interest rates, which then makes the cost of servicing the mega debt unsustainable.  Alternatively, if growth and inflation falters, more stimulus would be required, further increasing the debt, the classic vicious circle, the Feds Dilemma.  So, the policy exists to walk the tight-rope of achieving neither strong growth nor high inflation.  As in the circus, high wire acts only engender confidence with substantial rigging.  So, the logical extension leads to the question:  Has Fed omnipotence destroyed free markets forever?

We in Britain are living in the Age of Mega Debt, an experiment of Fiat Monetarism and Keynesian Government.  Because of this excess the model is no longer working due to the intrinsic features of debt.  Debt, by definition, is wealth today borrowed from the future, and in particular future generations, and because access to, and the cost of debt varies depending on who wants to borrow, inequality of wealth and opportunity can only rise at an exponential rate.  These facts are the pillars of division which this unstable structure stands.

To sustain a fiat monetary system, markets for debt and consumption must continually rise leaving inflation to do the rest.  Real assets, those with a finite supply, rise in value, benefiting asset holders thereby exacerbating inequality with those who do not.  The fiat system is inherently unstable.

To sure up this structure and prevent a further, wider collapse in confidence, may I suggest a back to basics solution, a Golden Rule (without the gold we no longer have):

The Government should legislate and commit to a Government <Gilt> Debt Ceiling to be reached at a pre-determined point in the future, say 10 years.

The socialist wing of the bourgeois may be foaming at the mouth, but fear not. The US has implemented and failed to keep to its debt ceiling, but we have our resolve.  Big idea infrastructure projects can still prosper as individual project bonds, as the European Union have recently explored.   Reforming the now dysfunctional normal distribution can reduce the Generational and Inter-generational inequalities which are, and will increasingly, blight our society.

Like all addictions, our Debt problem requires character to break.  To withdraw from the thing you think you need requires a determination, a strength not found in all, a vision of a better tomorrow.  While our fellow Europeans have chained themselves to the Euro, but without a fiscal union, we must steel a march.  We must strengthen our own monetary and fiscal position before we can help elsewhere.  To step confidently into the unknown but in the knowledge that to continue to walk this path of destruction only prolongs our fate a little longer.

A Government Debt Ceiling would bring about a new age of Sustainable Capitalism, transform the perception of our Government Debt, and by extension parliamentary politics into a valued commodity, a real asset, one of finite supply.  Interest rates can remain low, asset prices high, and our banks can once again, refocus on their customers.  The City has been given free rein for too long, in exchange for financing the profligate government deficits.  We must avoid blinkers but instead use new, advanced racing bridles, and the services of a Richard Hughes or Johnson so as to maintain a perfect partnership.

By changing perceived wisdom, our leaders will be forced to lead, and behaviour down the curve will be changed.  The majority of the great British public have only ever wanted genuine leadership from Government and authority.  Leaders with conviction, a sense of right and wrong, and a vision of a better future for all, not just a few.

But where will future growth come from I hear you cry.  Simply from the ingenuity of the young, and young at heart.  Groups of individuals empowered, without the yoke of excessive restriction, to engineer and create in any field of human need, using technology, as Google so admirably put it,  for the power of good.  Good ideas must flourish and bad ones fail, the nature of the beast.  We should reject the myth that failure is a sin which nobody returns.  Failure itself is merely the opportunity for further learning and to perfect ones ideas.

By setting our shoulders to the wheel, together we can reform the normal distribution, reduce the generational and intra-generational inequalities, and create order from this chaos, making Britain great once again.

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